Types of Forex Options The options on the foreign exchange market, contrary to popular belief, are not boundless. If you have the right strategies and know how to use them, you can make a major profit. Options provide ample opportunity for this to happen. They also offer a number of ways to limit your risk exposure. In general, the forex or currency option represents a derivative financial instrument which gives owners the right to exchange amounts of money in one currency into money in another on a set date and at a preliminary agreed exchange rate. The bulk of forex options is traded over-the-counter, with a small fraction being traded on exchanges like the Chicago Mercantile Exchange, Philadelphia Stock Exchange, and the International Securities Exchange. Retail traders have two main types of options to choose from. The call/ put option represents the one that is most frequently used by traders. “Call” refers to the time frame between the market opening and closing. The value of the call goes up in direct proportion to the underlying asset price. “Put” is an option that allows the owner to sell a certain amount of an asset at a fixed price and within a fixed time frame. The buyer of a put option expects the price of the asset to drop; so, he or she will profit by selling it before the price actually drops. The other main Forex option is the so-called SPOT or single payment option trading. This tool is more flexible for use by the traders. In this case, the investor can set both the size of the payout he or she wants and the terms that need to be fulfilled to get the payout. Brokers offering this option estimate the probability that the terms will be fulfilled and then charge the respective commission. Thus, the investor has two payout options to choose from: collecting it and not collecting it. This is why, SPOT is often referred to as a binary option. Traditional options allow investors to buy something at a fixed price and at a specified time. For example, if you buy two lots of USD/JPY, this is known as USD call/ JPY put. When you buy a call, you also buy a put at the same time. If the price of the pair drops below the price you purchased it at, you end up losing the premium. If the price rises above the buying price, you can exercise the option and win two lots for the price you bought it at, which you can then sell at a profit. Brokers offer two types of traditional options: American style and European style. The first option can be exercised whenever you choose and until the time it expires. On the other hand, the European style option can be exercised only upon expiration. Traditional options are advantageous in that their premiums are lower than those of the single payment option trading. The downside of traditional options is that they are harder to execute. Options are quite appealing for a variety of reasons, including the limited downside risk and the unlimited profit potential.